I am the founder and CEO of the Institute for Energy Research, a 501(c) 3 educational foundation with offices in Houston and in Washington, D.C. I am also adjunct scholar of the Cato Institute and of the Competitive Enterprise Institute; visiting fellow of the Institute of Economic Affairs in London; and honorary senior research fellow at the Center for Energy Economics at the University of Texas at Austin.
I hold a BA and MA in economics and a PhD in political economy. I received the Julian L. Simon Memorial Award in 2002 for my work on free market approaches to energy sustainability and blog on such issues at MasterResource.org.
I am author of seven books on energy history and policy, the most recent being "Edison to Enron: Energy Markets and Political Strategies." This is the second book of my trilogy on political capitalism described at my website www.politicalcapitalism.org.
I blog at www.masterresource.org

Energy Companies Are Not Sitting On "Inactive" Oil Leases, President Obama

Drilling companies most often lease the rights to drill for and produce oil. (Photo credit: Wikipedia)

The Obama Administration is hardly gung-ho about increasing fossil-fuel production. Yet the Department of Interior recently called on oil and gas companies to “develop the tens of millions of acres” of public land “they’ve already leased.”

This “touché” was intended to blunt criticism from the oil industry that federal bureaucrats were obstructing domestic energy production. But the Interior Department’s new report simply attempts to distract Americans from the feds’ constricting approach to domestic oil and gas production, a policy which deprives the American economy of thousands of new jobs and hundreds of billions of dollars in gross domestic product.

The DOI report notes that oil companies are lobbying for access to new sites for drilling even as they sit idly on acres upon acres of open leases. So why open up more reserves, when Big Oil isn’t using what it already has?

The report calculated that 70 percent of offshore acreage and nearly 56 percent of inland acreage are currently inactive. But DOI’s definition of “inactive” defies the realities of best-practices hydrocarbon production.

Specifically, acreage not currently producing or green-lighted for development is assumed to be “inactive,” which knocks out acreage where geophysical and geotechnical analyses and seismic surveys are underway. But what’s wrong with preparatory work that reduces dry–hole risk and other resource waste? The fact is that for every 100 new leased areas, only one will result in a viable oil discovery.

Obtaining a lease is just the first step in producing energy, after which companies must obtain exploration and drilling permits. Leases may appear idle — but only because planned exploration and development are being held up by other federal agencies, such as the Bureau of Ocean, EnergyManagement, Regulation and Enforcement.

Throughout the pre-leasing, leasing, exploration, drilling, and production processes, companies have to apply for more than 15 permits and comply with more than 90 sets of federal regulations. A permit just approved in Utah, for example, was four and half years in the making. In an earlier report on lease activity, this land would have been considered inactive.

The more the government stalls, the more oil and gas companies pay. Annual rental fees for leased land can now exceed $100,000 annually — and can increase as the lease goes on. This hardly suggests that companies are somehow incited to postpone drilling and production.

Not to worry, leases also include a “use it or lose it” provision to ensure that oil companies promptly return acreage unworthy of development to the government. Such is also the case with most private-land mineral development.

America’s oil and gas industry supports more than nine million U.S. jobs and nearly 8 percent of our country’s economy, while delivering more than $86 million in daily federal taxes. Such economic success would not be possible if oil and gas firms allowed truly lucrative leases and land to sit idle. That is what the profit system is all about.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

In 2008 the US produced 4.950 Million Barrels per Day (MB/D) while in 2011 it produced 5.675 MB/D. While that is an increase of 15%, it has hardly more than a drop in the barrel, as it were. Compared with production in 1970 of 9.6 MB/D and the fact that world demand for crude oil is much higher than in 1970, the small amount of increase is close to meaningless. Further, the majority of oil being brought into production is heavy, sour crude oil which has a low “crack spread”. In 1970, a much larger percentage of oil was sweet, light crude oil with a high crack spread. This means that in 1970 three gallons of crude oil might produce 1 gallon of gasoline and two gallons of fuel oil while today it might be five or more gallons of crude oil to produce the same amount of gasoline and fuel oil. Increasing production of heavy sour crude oils, to say nothing of “shale oil” and “oil sands” which have even poorer crack spreads, will not translate into more gasoline or fuel oil production.

Tell that to the Dakotas – which incidentally have the lowest unemployment rate in the country. According to the Government Accountability Office there is around 3 Trillion barrels of oil in the Green River Formation, nearly half of which is recoverable – about as much oil as the entire world’s proven reserves, combined……..But its under federal control. If Shale oil/Oil sands weren’t profitable, they wouldn’t be making it, but thats the great thing about technology and human ingenuity, something your lacking in spades.

You wrote:”If Shale oil/Oil sands weren’t profitable, they wouldn’t be making it, but thats the great thing about technology and human ingenuity, something your lacking in spades.”

I did not write that they were not profitable, I said that they have very low “crack spread”, which is to say it takes a great many more “barrels” of shale oil or oils sands to produce one gallon of gasoline than light sweet crude (with a 3-2-1 crack spread), or even conventional sour, heavy crude (with a 5-2-1 crack spread). The extraction of these materials, which are not actually “oil” but bitumen or kerogen, is only profitable when the market price is around 80 USD/B. It is profitable to extract sweet, light crude oil at much lower market prices.

On a technical note, bitumen is actually a form of asphalt. In the ground, it is found in “oils sands” and is a mixture of sand, rock, and bitumen. At room temperatures it is a solid. To get into the pipe line this material has to be heated and diluted with petroleum distillates producing “synthetic oil” or “syncrude”. Some times politely referred to as “extra heavy” crude oils (due to the high wax content, high API viscosity, high density) it is expensive to extract. It must either be mined from the surface like coal (to which it is just as similar as it is to oil) or through expensive steam injection with or without the injection of petroleum distillates. Production costs are quite a bit higher. Natural gas has to be burned into order to generate the steam needed to made the bitumen fluid enough to move. The diluted sycrude must be extensively processed before it can be distilled, most commonly through catalytic hydrocracking. This product is sold as “Western Canadian Select” (WCS) which actually is a blend of both conventional heavy oil and unconventional diluted bitumen. Bitumen is so low in capacity to produce gasoline and so viscous and dense, it cannot be processed directly. WCS has a lower crack spread and as result sells for much less than other products, and thus produces fewer gallons of gasoline and fuel oil, and thus has lower market prices. For example, West Texas Intermediate (WTI), a bench mark light crude oil, had an average price in 2011 of about 95 USD/bbl while WCS averaged around 76 USD/bbl remembering that WCS is only a partially bitumen. The point of all of this is that just because there is a “proven reserve” of so-many “barrels of crude” that could be extracted from North America is not the same as if there an equivalent number of barrels of WTI or Saudi oil.

Increasing oil sand production will not necessarily increase gasoline production.

The Obama Administration is indeed playing up for political purposes petroleum development [1]. On the DOI webpage it is written:

“According to the report, more than 70 percent of the tens of millions of offshore acres currently under lease are inactive, neither producing nor currently subject to approved or pending exploration or development plans. Out of nearly 36 million acres leased offshore, only about 10 million acres are active – leaving nearly 72 percent of the offshore leased area idle.”

The entire “report”, which is not much more than an extended press release goes into a bit more detail [2].

However, the DOI is simply responding to equally meaningless attacks by conservatives who insist that the Administration is slowing or blocking oil exploration (“Drill, Baby, Drill”).

The simple fact of the matter is that US oil production has been declining for 40 years. In 1970 product was at 9.6 million barrels per day while in 2010 it was 5.6.[3]. No matter how many wells are drilled and produced, US oil production will not return to pre-1970 levels, or even pre-2000 levels. The idea that there are huge reserves of untapped and readily accessible oil is a point no one wants to address.